Are You Going to a School with a High Student Loan Default Rate?

Though well-intentioned, the U.S. Department of Education may be raising the hopes of prospective college students in a way that solidifies why we are GenFKD.

Ah, The Sweet “Breather”

As college students across the country get back into the swing of things for spring semester, there is one thing that many await — federal aid disbursement. It’s the day that the money left over from paying tuition and other school expenses finds its way into their bank accounts. Students can finally take a deep breath, buy two boxes of Franzia, and set up their semester budgets. But, did they check to see how their schools are doing when it comes to students paying back these loans?

One day we’ll have to pay back these semester “breathers” to the government. Will our 3.5 GPA be enough? Will we have acquired the skills to make a large enough paycheck to cover those monthly payments? Well, according to the Wall Street Journal, if we go to some schools, the odds may be rather grim.

Ugh, The Numbers Do (Not) Lie

In a study, by the Wall Street Journal, over 1,600 colleges and universities are compared by their student-loan nonpayment and default rates. At the top of the list for highest default rates are St. Augustine’s University, Institute of American Indian and Alaska Native Culture, Benedict College, Morris College, and Allen University, all with rates higher than 31 percent. Keep in mind; this isn’t counting the “nonpayment rate” which ranges from 61 to 82 percent.

This study was inspired by a message from the Department of Education to Arkansas Baptist College. The notice warned the college that it was going to lose its federal funding if the default rate were to supersede 30 percent for the third year in a row. However, that warning came with some much-needed assistance. The
DOE was able to shed a light on some loopholes that could keep the school in the green to receive federal funding.

Schools with a high student-loan default rate are using statistical massaging of the numbers, aka “excuses,” to help their rates go down. The DOE would allow the data to dismiss students that have multiple loans, died, or have other troubling economic situations like unemployment, in order to bring the default rates down.

Another tactic, which was infamously used by Corinthian Colleges, Inc. (RIP), is forbearance. Forbearance is a process in which students are given the delicious option of being able to push their loan payments for two years, while still accruing interest. After the two years, students would default, but these would not count toward the school’s default rate.

Don’t be fooled, other colleges and universities are doing the same thing! At 108 four-year colleges, over 50 percent of all students had not paid even one dollar of their student loans after three years of leaving college. Although the DOE makes the default rates public, it does nothing to stop the practice of shady data manipulation that masks the universities’ default rates. It provides “default management workshops” for crying out loud.

Check Yo’self Before You Wreck Yo’self

Going to school and taking out loans is always risky, but at some schools, it’s an even bigger risk. By not allowing the federal loans’ interest rates to fluctuate according to the default risk, this distorts the information conveyed by the price.

Unfortunately, it’s a double-edged sword for the DOE. Allowing the interest rate on the loans to increase for risky schools may deter students from going to those schools, but could hurt the students that do attend. Alternatively, the DOE could provide more grants to those risky schools, but then you risk throwing away more taxpayer dollars on students and schools that cannot produce.

What we’re trying to point out is that the Department of Education may have the college-goer’s best interest in mind, but not in practice. By helping these schools “manage” their default rates, students are getting FKD’ed. Allowing students to receive the same federal student loan, with the same interest rate, whether they go to a school with a zero- or a 26-percent default rate is absurd and misleading, but it is what it is for right now.

Thankfully, the WSJ provides us with a better view of which schools are coming through with getting students the jobs that pay enough to meet their debt payments and which schools are struggling in that department.

Are you going to a school with a high default rate? Check for yourself here.

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Published by Kevin D. Gomez

Kevin D. Gomez is an Instructor of Economics at Creighton University and Program Manager at the Institute for Economic Inquiry. He received his B.S. in Economics and Statistics from Florida State University and his M.A. from George Mason University. Trying to pay it forward by helping noneconomists make sense of the crazy world.
View all posts by Kevin D. Gomez

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